Tactical asset management: an educated selectivity

By MARGARET R. McDOWELL / 850-608-6121

Published: Friday, April 12, 2013 at 03:56 PM.

The traditional thinking regarding purchasing index funds, or what is known as tracking a segment of the market, is that eventually stocks will go up. And since timing market movements is considered impossible, why not simply buy an index fund that offers broad exposure to the market. So investors or advisors buy, say, the S&P 500, and hold this index fund, trusting that eventually their investments will increase in value.

Historically, the market does always eventually go up, if one considers 30 and 50 and 100-year historical data. And the S&P 500 contains more than 70 percent of all U.S. stocks, so if the market goes up, your portfolio value should increase, right? After all, your index has provided broad market exposure.

In today’s investing environment, though, indexing and broad exposure have evolved into the mantra of selectivity. When I entered the investment advisory field 18 years ago, buying an index often made sense, even for those for whom capital preservation was paramount. At that time an investor or advisor could buy virtually any security and be assured of some growth.

Since then things have changed drastically, though, for both individual investors and advisors. The tech boom collapsed in 2000, and the Great Recession represented the worst financial downturn since the era of the Great Depression. Investors who waited out the downturn lost an average of 37 percent of value, short-term, in their portfolios.

The market has come back since then, and many folks who held on to their securities are back where they were in 2008. The question that must be asked, though, is how does one get back those lost years of investing? Because even if you’re back to where you were in late 2007 in your overall portfolio value, you’ve lost the better part of six years and your holdings have lost value to ongoing inflation.

Investors nearing or in retirement simply may not have the time horizon, generally speaking, to wait for the market to right itself. For instance, the S&P flatlined from 1966 to 1982. For some of us, 16 years may be the better part of our retirement timeline. That’s a long time to wait during retirement for a payoff from one’s investments.

Thus, the movement to tactical asset management has gained a tremendous following. Tactical asset management requires that an investor or advisor exercise educated selectivity in choosing investments and often involves periodic rebalancing, as well as the willingness to occasionally sell securities outright if stocks are nose-diving and it is appropriate for the investor. In other words, buy the leaders and leave the laggards. This selectivity requires market knowledge and investing experience. Part art and part skill, it is much more challenging than purchasing an index.

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The traditional thinking regarding purchasing index funds, or what is known as tracking a segment of the market, is that eventually stocks will go up. And since timing market movements is considered impossible, why not simply buy an index fund that offers broad exposure to the market. So investors or advisors buy, say, the S&P 500, and hold this index fund, trusting that eventually their investments will increase in value.

Historically, the market does always eventually go up, if one considers 30 and 50 and 100-year historical data. And the S&P 500 contains more than 70 percent of all U.S. stocks, so if the market goes up, your portfolio value should increase, right? After all, your index has provided broad market exposure.

In today’s investing environment, though, indexing and broad exposure have evolved into the mantra of selectivity. When I entered the investment advisory field 18 years ago, buying an index often made sense, even for those for whom capital preservation was paramount. At that time an investor or advisor could buy virtually any security and be assured of some growth.

Since then things have changed drastically, though, for both individual investors and advisors. The tech boom collapsed in 2000, and the Great Recession represented the worst financial downturn since the era of the Great Depression. Investors who waited out the downturn lost an average of 37 percent of value, short-term, in their portfolios.

The market has come back since then, and many folks who held on to their securities are back where they were in 2008. The question that must be asked, though, is how does one get back those lost years of investing? Because even if you’re back to where you were in late 2007 in your overall portfolio value, you’ve lost the better part of six years and your holdings have lost value to ongoing inflation.

Investors nearing or in retirement simply may not have the time horizon, generally speaking, to wait for the market to right itself. For instance, the S&P flatlined from 1966 to 1982. For some of us, 16 years may be the better part of our retirement timeline. That’s a long time to wait during retirement for a payoff from one’s investments.

Thus, the movement to tactical asset management has gained a tremendous following. Tactical asset management requires that an investor or advisor exercise educated selectivity in choosing investments and often involves periodic rebalancing, as well as the willingness to occasionally sell securities outright if stocks are nose-diving and it is appropriate for the investor. In other words, buy the leaders and leave the laggards. This selectivity requires market knowledge and investing experience. Part art and part skill, it is much more challenging than purchasing an index.